The Brief History of Behavioral Economics
- Alex Shilman
- Jul 13
- 4 min read
“The Depression Problem Has Been Solved”—Until It Wasn’t
At the 2003 annual meeting of the American Economic Association, Nobel laureate economist Robert Lucas delivered the keynote speech. His message was simple: “The central problem of depression prevention has been solved, for all practical purposes.”
Just a few months later, a Princeton professor named Ben Bernanke—soon to be appointed Chair of the U.S. Federal Reserve—echoed a similar sentiment.
But only five years later, in September 2008, during Bernanke’s tenure, the United States was hit by the worst financial crisis in its history. Tens of millions of Americans lost their jobs, and many lost their savings and homes.
Economists found themselves in a position eerily similar to that of physicists at the start of the 20th century. At the time, leading physicists believed the mysteries of the universe had already been solved. They even discouraged brilliant students from entering the field, insisting there was nothing left to discover—until Einstein arrived in 1905 with four revolutionary papers that upended everything since Newton.
Unlike the physicists, however, economists didn’t have to rewrite textbooks from scratch. The answers they needed had already been published three decades earlier by two Israeli psychologists, patiently waiting for their moment in the spotlight.
The joint work of Daniel Kahneman and Amos Tversky had earned Kahneman a Nobel Prize in Economics back in 2002. But despite this recognition, their insights into human irrationality remained mostly confined to psychology departments and small enclaves within economics faculties.
Behavioral Economics Hits the Bookshelves
When the financial crisis erupted, two books based on the work of Kahneman and Tversky happened to be sitting on the shelves of popular bookstores. One was Predictably Irrational, by young and promising Israeli professor Dan Ariely from MIT. The other was Nudge, by University of Chicago economist Richard Thaler and legal scholar Cass Sunstein, focusing on public policy for irrational citizens.
In January 2009, just as the crisis reached its peak, newly elected President Barack Obama appointed Sunstein to lead the White House’s Social and Behavioral Sciences Team, hoping to harness behavioral insights to help steer the country out of the crisis.
And just like that, behavioral economics made its way from obscure academic discussions into the center of public discourse. It would take a few more years to gain real traction, but the seeds were planted.
From Theory to Policy
In mid-2010, the British government launched the Behavioral Insights Team—also known as The Nudge Unit. Its mission was to apply behavioral science to improve governance:
encouraging tax compliance
reducing unnecessary antibiotic prescriptions
boosting community donations
shortening unemployment durations
These were all small-scale interventions that delivered outsized impact.
What began as psychological experiments with undergrad volunteers had now proven effective at the national scale—changing the behavior of millions of British citizens. The success of the UK initiative led to a wave of similar teams worldwide. By the end of the decade, the OECD had documented over 202 behavioral science teams working in government.
The Rise of Tech (and the Dark Side)
In October 2010, Instagram joined the social media family. Its launch marked the culmination of two revolutions:
The smartphone-as-lifelogger, which began with the iPhone in 2007.
The addictive “scroll-stimulus-like” loop of social media.
For commercial companies, the smartphone was a turning point. No longer did they need to reshape the physical environment; now they could manipulate behavior directly via each person’s screen. Big Tech—and hungry startups—rushed into this gray zone.
In July 2010, UX expert and cognitive psychologist Harry Brignull launched darkpatterns.org to expose the manipulative use of behavioral science in digital design. Awareness of this ethical gray area spread slowly through corporate America. In 2015, former Google design ethicist Tristan Harris joined the movement. A former designer at Instagram, Harris had sold his startup to Google, where he later became a whistleblower against the attention economy.
By the end of the decade, public outrage peaked with the Cambridge Analytica scandal—exposing psychological targeting, Russian influence in the U.S. elections, and the Brexit referendum.
As more revelations surfaced, it became clear that the combination of massive behavioral datasets, precise AI targeting, and subtle manipulation techniques was not just a marketing tool—it was a powerful weapon.
Governments took notice. In early 2019, U.S. lawmakers began debating bills to regulate behavioral design practices. At the end of 2019, the European Union banned the longstanding use of dark patterns by companies like Booking.com, forbidding them from using psychological tricks to nudge purchases.
Institutional Recognition
In 2017, the Swedish Royal Academy awarded the Nobel Prize in Economics to Richard Thaler, co-author of Nudge.
Thaler had been the first economist to embrace Kahneman and Tversky’s findings about human irrationality back in the 1970s. Over the years, he became a central figure in a growing intellectual rebellion against the rational-agent assumptions of mainstream economic models.
Thaler distinguished between the “Econs” (homo economicus) assumed in economic theory and actual human beings as described by psychology—irrational, emotional, and full of cognitive shortcuts.
This Nobel Prize was a crucial signal from the economic establishment: not just symbolic recognition of psychology’s contribution, but an acknowledgment that behavioral economics was a legitimate, independent branch of economics. Around the same time, Harvard’s head of economics edited the first mainstream textbook to treat behavioral economics as core material, not just a footnote.
A New Decade, A New Approach
The decade ended with another nod from the Nobel committee—this time to development economist Esther Duflo and her colleagues in 2019. While Duflo isn’t a behavioral economist per se, she shares its core principle: build theory from human behavior observed in the field, not the other way around.
In her fight against poverty, Duflo rejected elegant theoretical models in favor of pragmatic, field-based experimentation—revolutionizing the way aid is designed and delivered.
Historically, economics—not psychology—has been the social science most closely tied to public policy and business strategy. As a result, it was economists, not psychologists, who ultimately brought behavioral insights into the mainstream. That explains the ongoing dual identity of the field: taught as “decision-making” by psychologists, but practiced as “behavioral economics” by economists and policy professionals alike.
Originally Appeared in "TheMarker"